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A Perspective on Michigan’s Tax Overhaul

It seems I continually still see newspaper articles, editorials and letters to the editor in various publications referring to the Michigan tax overhaul as a “$1.8 billion dollar give-a-way to business”. Let’s investigate this claim.

If you work in Michigan as an employee of a business in Michigan, you pay State of Michigan income tax on your wages. It doesn’t matter if you make minimum wage or $1,000,000 per year, you pay tax at the statutory rate on the Michigan Form MI-1040 (currently 4.35%).

However, if you start your own business, grow it into a success, hire others and otherwise prosper, you have had the privilege of paying extra tax to the State of Michigan. The Michigan Business Tax (MBT) is (was) calculated in two different ways, generally applying a more favorable calculation to smaller businesses, but having an absolute cliff for larger or more profitable businesses where the tax liability, depending on several factors, could increase exponentially for a small increase in income. The more favorable calculation is a 1.8% tax on the taxable income of the business plus all wages and benefits paid on behalf of the owner and his family members.

Here is where businesses have been getting double taxed for years: most small businesses are organized as pass-through entities (S corporations, partnerships, LLC’s). These entities pay no tax at the federal level – their income is passed through and taxed on the tax returns of their owners. This treatment at the federal level has effectively been ignored in Michigan. These businesses still had to prepare an MBT return and pay any applicable tax.

These pass-through entities prepare their federal tax return, passing the income through to their owners who include it on their federal tax returns. These same owners prepare their Michigan MI-1040 by starting with Adjusted Gross Income on their federal return which, of course, includes the income from the pass-through entity.

So, the unsuspecting business owner, perhaps in the same economic circumstances of someone in a similar field working as an employee for someone else, has had the privilege of paying a significantly higher tax rate. Two taxes on the same income – seems like that should be unconstitutional!

The tax overhaul eliminates the filing requirement for most pass-through entities and no longer results in double taxation in the State of Michigan. Only C corporations are subject to the new corporate income tax – all pass-through entities and individuals will pay tax at the Michigan individual income tax rate only. This creates basic fairness in the tax system that has not existed for 35 years.

Michigan has recently vaulted from near the bottom to near the top of best places to do business in the U.S. as a result of these changes according to the Tax Foundation. This is obviously great news for the State and will ultimately result in more revenue flowing into the State Treasury.

Basic economics still rule – if you want more of something – tax it less.

"Working abroad? You can have confidence in my ability to handle the complexities of working overseas. Know that I am available to answer your questions, even if you live in another state, another time zone or another country."

--Scot Smith

"Is Payroll giving you a headache? I am here to take the confusion out of payroll and make it simple for you."

--Melissa King

"Do you need to know what your business is worth? As a CVA I handle everything from estates to divorce to mergers and acquisitions. Count on me for prompt and professional service."

--Heather Graham

"Too time-consuming to make a trip into our office for help? I can save you time and money by using technology to remotely fix problems or just answer questions."

--Jennifer Wentworth

"Business valuation and litigation support are serious business. I take the time to put myself in your shoes and understand your needs. The best outcome is achieved when your business valuation expert truly understands your situation." --Paul Murray

"Want more than just tax preparation? I have always told prospective clients that most anyone can provide accounting and tax services from a compliance perspective. Good CPAs provide tax saving strategies and other business insights to increase profitability." --Gene Smith

"Does your business need financial direction? I will help you understand your financial reports and set reasonable expectations, both of which are key to making sound business decisions."

--Keith Frame

"Getting stuck in QuickBooks? I can get you unstuck, and help you learn the software to run your business more effectively."

--Tina Powell

"Tax season got you stressed? I am here to help get you through tax packets and documents, so you can walk away with the weight off of your shoulders."

--Sara Brubaker

"New to accounting or not sure what questions to ask? I understand those anxieties and am happy to answer your questions and put your concerns to rest."

--Anna Philbert

"Perplexed by tax documents? I am here to answer questions and help you understand the forms, packets of information and required payments our CPAs calculate for you."

"Working abroad? You can have confidence in my ability to handle the complexities of working overseas. Know that I am available to answer your questions, even if you live in another state, another time zone or another country."

--Scot Smith

"Is Payroll giving you a headache? I am here to take the confusion out of payroll and make it simple for you."

--Melissa King

"Do you need to know what your business is worth? As a CVA I handle everything from estates to divorce to mergers and acquisitions. Count on me for prompt and professional service."

--Heather Graham

"Too time-consuming to make a trip into our office for help? I can save you time and money by using technology to remotely fix problems or just answer questions."

--Jennifer Wentworth

"Business valuation and litigation support are serious business. I take the time to put myself in your shoes and understand your needs. The best outcome is achieved when your business valuation expert truly understands your situation." --Paul Murray

"Want more than just tax preparation? I have always told prospective clients that most anyone can provide accounting and tax services from a compliance perspective. Good CPAs provide tax saving strategies and other business insights to increase profitability." --Gene Smith

"Does your business need financial direction? I will help you understand your financial reports and set reasonable expectations, both of which are key to making sound business decisions."

--Keith Frame

"Getting stuck in QuickBooks? I can get you unstuck, and help you learn the software to run your business more effectively."

--Tina Powell

"Tax season got you stressed? I am here to help get you through tax packets and documents, so you can walk away with the weight off of your shoulders."

--Sara Brubaker

"New to accounting or not sure what questions to ask? I understand those anxieties and am happy to answer your questions and put your concerns to rest."

--Anna Philbert

"Perplexed by tax documents? I am here to answer questions and help you understand the forms, packets of information and required payments our CPAs calculate for you."